On September 21, 2018, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) ruled that FERC’s order to deny ANR Storage Company’s (“ANR”) request to charge market-based rates was arbitrary and capricious. The D.C. Circuit found that FERC provided no basis for treating ANR differently from another competitor, DTE Energy Company (“DTE”) in a prior decision, and that FERC’s explanation for why intrastate facilities could not restrain ANR’s exercise of market power was internally inconsistent. As such, the D.C. Circuit remanded the proceeding back to FERC.

FERC generally allows suppliers of natural gas and natural gas storage services to charge cost-based rates, as it considers these rates to be largely “just and reasonable.” FERC will only allow a natural gas company to charge market-based rates when it can persuasively show that it lacks market power in its relevant markets. In 2012, ANR petitioned FERC for market-based rate authority for its natural gas storage services. In 2014, an Administrative Law Judge (“ALJ”) determined that ANR failed to show that it lacked market power and declined to grant market-based rate authority. On review, in 2015, FERC affirmed the ALJ’s initial decision. Although FERC acknowledged that it had authorized entities to charge market-based rates when their share of the market was similar to ANR’s, FERC found that, in ANR’s case, it was “the largest competitor in the market for working gas, and that a significant part of that market consisted of intrastate or subscribed storage capacity.” After FERC denied rehearing in 2016, ANR appealed to the D.C. Circuit.

In its petition to the D.C. Circuit, ANR argued that FERC’s finding that ANR exercised market power differed from its findings in prior proceedings. ANR contended that a market share of 16% cannot establish that it exercised market power, at least in unconcentrated markets, and that FERC usually granted market-based rate authority in that context. The D.C. Circuit disagreed and reasoned that “we cannot fault FERC’s analysis that, even in an unconcentrated market, a 16% share held by the single largest storage provider is more concerning than comparable shares held by new entrants to competitive markets.” However, the D.C. Circuit agreed that FERC did not adequately distinguish its past decisions involving DTE, in which it permitted DTE to charge market-based rates, even though it was a leading supplier of natural gas and had a market share of 18% and a daily deliverability of 17%—higher than ANR’s shares. The D.C. Circuit found that FERC “barely even mention[] FERC’s disparate treatment of the two companies” and that FERC ultimately did not “provide some reasonable justification for treating ANR and DTE differently.”

The Court also agreed with ANR’s argument that FERC’s analysis of its storage capacity was internally inconsistent. In defining ANR’s relevant product market, FERC included intrastate gas storage and already-subscribed gas storage, deeming both to be “good alternatives” to ANR’s storage service. However, FERC also stated that those alternatives would not be enough to constrain ANR’s exercise of market power. In its opinion, the D.C. Circuit noted that while “substitutability is a question of degree,” it made little sense for FERC’s analysis to indicate “good alternatives” existed in the relevant product market, but conclude, without further justification, that those alternatives were insufficient.

For these reasons, the D.C. Circuit remanded the case back to FERC. The D.C. Circuit’s opinion can be found here.

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